Co-op Expansions Raise the Bar

Every expansion is unique in some respect, but the universal truth is that building a larger facility includes taking on a bigger role in the community. More and more food co-ops are remodeling, relocating, building additional locations, hiring more staff, and adding more products and services. Meanwhile, many of them face formidable competition from chains and superstores, and the pressure is on to succeed quickly and well.

What is the cumulative impact of all these forces on store operations once an expansion is complete? A majority of all food co-ops has completed an expansion project during the past five years or are in the process of completing an expansion. By examining the impact of food co-op expansions on retail performance, we can identify ways this major opportunity can be managed more efficiently, profitably, and with less risk.

Over the past three months, a team of Cooperative Development Services (CDS) finance and expansion consultants have worked to answer questions related to food co-op expansion projects: Are sales projections being met? How long does it take to reach profitability? Is there adequate cash and equity to absorb initial operating losses? How does actual performance compare to projections?

This article will examine the results of a survey we conducted earlier this year of food co-ops that have been through expansion projects, including on-site expansions, relocations, and second-store developments.

Criteria and methodology

We established criteria to select participating co-ops, designed a survey, and then created a database that combined information from the survey with data from the Common Cooperative Financial Statements (CoCoFiSt) database.

Criteria for participating co-ops: During a year since 2000, the co-op must:

have had at least a 20 percent growth in assets and at least a $50,000 increase in assets compared to the previous year;

have carried out an expansion, relocation, or additional store (not a new co-op);

have completed an expansion at least four quarters ago;

have a willingness and ability to provide all needed data in a timely manner; and

be a CoCoFiSt participant.

Using these criteria for participation, along with a phone interview, we narrowed our list to 20 co-ops that were invited to fill out a survey. A database that allowed analysis was created from 13 projects of 12 responding co-ops. Expansion project budgets of the responding co-ops averaged $670,000 and ranged from $350,000 to $1,265,000. (We are aware of a number of projects with much larger budgets that did not meet the criteria or did not participate in the survey.)

Survey Findings

Sales projections: Of the 12 co-ops that completed the survey, 10 provided comparison of projected versus actual sales. All 10 co-ops met their sales projections in the first year of their new store’s operations, with eight co-ops exceeding projections.

Gross margin: Of the eight co-ops that provided comparison of actual vs. projected, only three met their margin projections in the first year. The five co-ops that didn’t meet margin projections missed by an average of 2 points.

Labor: Of the seven co-ops that provided comparison of actual vs. projected, only three met their labor projections in the first year. The four co-ops that didn’t meet labor projections missed by an average of 2.75 points.

Profitability: Of the 10 co-ops that reported quarterly net income results, four were profitable in the first year, and three were still not profitable after two years. Of those three unprofitable co-ops, two had inadequate cash reserves after two years.

Project budgets: Of the 13 projects (from 12 co-ops) that completed the survey, seven were over budget, three were right on budget and three came in under budget. Six of the projects met their timeline, six went over time, and one had no timeline.

We have the beginnings of a database that can be a tool to monitor the performance of food co-ops following expansions. A larger database would make generalizations less risky, more reliable. If we can triple the number of co-ops who contribute to this database, the food co-op system will have an increasingly relevant tool for guiding future expansions.

With the expansion data we collected, combined with hands-on professional experience, we were able to arrive at the following generalizations about food co-op expansions and operations:

Most co-ops planning an expansion project create a project budget and a financial pro forma, but once the expansion is complete they seldom formally compare actual to projected.

Most co-ops meet sales projections.

First-year labor costs are higher as a percentage of sales than before the expansion and generally higher than projected.

Some co-ops dig a hole for themselves with cash-flow problems due to higher expenses than projected (primarily labor costs) and secondarily due to project cost overruns and delays.

Comparing budgeted total project costs with actual total costs is most important as a means of assessing the co-op’s cash and working capital position at the time of store opening. For example, if all the first year working capital has been used up by cost overruns during the project, it is critical to be aware of that and deal with the consequences as soon as possible. Actual timelines and expenditures are rarely the same as projections.

Sally Lovell, senior accounting analyst at The Food Co-op in Port Townsend, Wash. said their expansion was very well planned, and credits General Manager Briar Kolp for her work on the project. Yet problems occurred despite all the preparations. Their POS vendor seriously underestimated the amount of time needed for installation and training, and ultimately this severely strained The Food Co-op’s operations. They opened their new store when people didn’t fully understand the system yet. Sales doubled along with the initial stumbles within the POS system, creating a cascading effect of personnel falling behind. Subsequent software contingencies created financial reporting challenges she had to work out. The changes the store was making on the front end had to happen so quickly, she said, that the “infrastructure couldn’t keep up.”

In retrospect, Lovell said, they probably wouldn’t introduce a POS system concurrent with an expansion, or at least would allow a lot more time for integrating the system into store operations. The staff was “playing catch-up,” while customers were flocking to the store. “It was a wonderful problem to have,” she said. But all of that took a lot of focus, leaving little time for other things—and “so many things have to happen at once.”

Almost every co-op participating in the expansion survey exceeded their sales projections, and as Lovell said, it’s a “happy” problem. But it’s a problem nonetheless when operations are struggling to keep up.

At the People’s Food Co-op in Portland, Ore., Financial Manager Miles Uchida said that sales post-expansion have been very good, but during the expansion and remodel, which was on-site and disruptive, sales growth slowed by 2 percent. The co-op went from 1,000 square feet retail to 2,400. “We did go through a period where we considered moving, but this is a special area,” said Uchida. The remodel was challenging because they first had to add on over half of the building, and when that was finished they had to remodel the other half. “We began in winter, and it was raining a lot. It was loud, muddy, and the project ran into the street.” These things cost them time, money, and customers, and the project went beyond their budgeted cost overrun allowance by 11 percent.

Now, however, sales growth is double what had been budgeted, and both the number of daily transactions and members have doubled since the expansion. Everyone’s happy with the project outcome, although it was a little rough along the way remodeling an existing store.

Operational priorities: sales, margin, labor, inventory

Based upon observing and assisting a number of food co-op expansion projects, we suggest that operational system priorities should fall into place in this order: sales, margin, labor, and inventory turns.

This sequence does not suggest that you ignore margin, labor and inventory turns while you are building sales, but that your primary initial focus be on building sales, with a secondary focus on margin, etc. Once a strong sales level has been achieved, the primary focus becomes margin—while maintaining sales momentum. Labor becomes the secondary focus and is on deck to become the primary focus once gross margin goals have been achieved.

In order to proceed with these suggested priorities, it is imperative that the co-op have adequate working capital and cash reserves to get through the likely initial period (up to two years) of operating losses. However, while it is wise to prepare for initial operating losses, we have seen a number of co-ops that have been profitable in the first year of an expanded store. Don’t treat projected operating losses as an allowance for spending.

With good sales comes the flexibility to work out other issues with margin, labor, and inventory. But poor sales challenges everything.

Achieving good sales is great and a relief post-expansion—but that’s something People’s Food Co-op actively planned for. Uchida believes the investment in promotions and public relations touting the store’s green features generated a lot of publicity and word-of-mouth excitement. “Sales were the key thing we were monitoring,” he said, and their tracking and reporting got better with the new systems in the expanded store.

But good sales after an expansion doesn’t mean you’re out of the woods, Uchida pointed out. Sales are still high on the list of priorities at People’s Food Co-op, which has a strong competitor that moved in six blocks away. He said the co-op felt prepared for its added labor expenses to build sales but conjectured that if they had made a larger leap in size, it might have been more difficult to stay on budget.

Berkshire Co-op Market in Great Barrington, Mass. is one store that made a large leap in a number of ways. The co-op relocated from a small, cramped store hidden in a residential area to a very visible 4,500-square-foot retail location 2.5 times their previous size. “Good sales gives you momentum,” said Art Ames, general manager. “I totally agree with the priorities of sales, margin, labor, and inventory,” Ames said, but cautioned that they’re all interconnected. It’s a real balancing act—for example, building sales during an expansion can challenge the labor budget, and having the right inventory attracts shoppers in the first place.

“Labor is the biggest pressure on a co-op,” Ames said, because there are so many competing issues and constituencies that come into play on the labor expense line. “I felt it was important to have whatever we needed for labor when we opened. We started out with a bang, and sales were great.” The co-op had exceeded the labor budget, which was something of a cause for concern, but with time and attention, within nine months following the expansion, they were able to work it out.

Ames didn’t think the co-op’s problems with labor were all that unusual given their circumstances because not all systems were in place prior to the expansion. He noted Berkshire Co-op was a marginal business before the expansion that had to grow up fast with new management in order to capitalize on the opportunities they suddenly had—a viable and visible location.

In terms of staffing, department managers had to learn how to become leaders and better managers. There was a learning curve as people adjusted to changed expectations in the expanded store. Labor challenges at Berkshire weren’t just about finding the right balance of staffing but also involved adding training programs and changing the work culture.

Investment in workplace development has a long-term impact on store operations. Finding the right balance of skill, talent, and staffing is often an issue for expanding co-ops.

Lessons learned

There are many challenges to food co-op operations during and after an expansion, not the least of which is growing into its newly visible and often greater role in the community. A lot of times this involves a dramatic and sometimes rapid cultural shift that affects not only operations but also the whole identity of the co-op. In order for this change to be absorbed internally and externally, overall expansion planning and execution really point to internal readiness.

The Food Co-op expansion in Port Townsend was widely lauded by shoppers old and new. According to Lovell, one of the overall changes they implemented was to be welcoming to all. “The previous store had a history of cliques,” she said. “We made our focus ‘everyone welcome.’ We followed through on that by focusing on customer service.” Their intense focus on service helped a lot in keeping people satisfied while the co-op worked out POS issues. “People were cheerful and took it well.”

At People’s Food Co-op in Portland, Uchida said a big cultural shift for their co-op was learning to trust and accept outside advice in what he called a staunchly Do-it-Yourself culture. “We needed to be realistic about the investment we were making in the expansion and all the training, hiring, and budgeting we needed to do. We had to get to clear steps on organizational development, finance, and logistics; and we needed to hire an expert to help us.”

Uchida postulated that if the organization had gotten to that point earlier, perhaps the project wouldn’t have run over budget. His advice? “Get support from other people. Do as little reinventing of the wheel as possible.”

Art Ames at Berkshire Co-op Market agreed with that assessment. During their expansion, he acted as project manager while managing the co-op. It made for a very difficult year, especially since his first week on the job involved negotiating the lease for the new location. In retrospect, he says he would have hired a project manager. “The manager is the hub for everyone’s concerns. It’s hard to do both

[jobs].”

He was also challenged by a communal attitude favoring smallness that in some ways had kept the store from moving forward earlier. “What I saw as a cramped, unshoppable store, some people perceived as cozy.” Going into the expansion, he and others believed that they couldn’t invest in their community by not investing in themselves. It gave them the impetus to carry on with the hard work.

In all of the examples we studied, general managers agreed that it takes a tremendous amount of vision and organizational clarity, as well as a thick skin, to pull off an expansion. Cultural shifts needed to occur in order for new operations to work and be embraced. From a leadership standpoint, it takes the collective will of thousands (staff, board, members, management, vendors, and consultants) to support and maintain a successful expansion. Ames said, “The general manager is the cheerleader and planner, reaching out to every group of stakeholders, whose interests are diverse.”

Here is the primary lesson learned from the limited amount of data we gathered: Labor costs in the first year of an expansion project are not only likely to be much higher (as a percentage of sales) than what the co-op experienced in its previous location, they are higher than what many stores have projected. The expanded space requires the creation of new operating systems. Efficiencies will evolve out of those systems.

It is important to project conservatively and then to aggressively pursue your prioritized targets for sales growth, gross margin, labor, inventory turns, and general expense control.
If your sales are short of your projections, we hope that the first response is not to cut labor costs. It is important not to jeopardize or compromise your store presentation and service level during the critical time of building sales. Thus, it is essential to plan ahead to have adequate cash reserves and working capital to see you through on your road to sustained profitability.

Acknowledgements: Thanks to Walden Swanson, Kate Sumberg, Steve Wolfe, Darcy Klasna, and Marilyn School for their generous contributions to this project.

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